Welcome to the electric society
Extract from remarks by Dr Eddie O’Connor to the BOAO Conference, Seattle, September 2014. Last week my company, Mainstream Renewable Power, announced a change to our corporate strategy. This evolution in our approach from creating value by developing renewable energy in regulated markets, to one where we will increasingly partner with customers to build bespoke generation, has come about due to the profound change underway in the wider energy sector. 2014 will be seen as the year in which renewable electricity fully emerged as a mainstream generation technology and we passed the point of no return in our creation of the electric society. Firstly, we have had confirmation that new wind and solar plant now has a lower cost of energy than comparable new fossil generation across a number of markets. The continued price degression for both onshore wind and solar PV has seen a number of analysts confirm that we have arrived at an inflection point in the cost of these technologies in relation to traditional fossil generation. Secondly, with an eye on the likelihood of a global climate deal at COP21 in Paris in 2015, institutional investors are now closely examining the prospect of stranded fossil assets and have begun to price in the cost of carbon to corporate inventories, in what is termed a “carbon bubble”. At the same time, growing energy efficiency is shrinking the market for fuels. According to Bloomberg New Energy Finance, imports of oil into the USA have dropped nearly twice as much because of improved vehicle efficiency and reductions in miles driven, than they have because of discoveries of unconventional oil. Thirdly, alternatives to renewables have fallen away. The two other major low carbon technologies expected to make an impact, CCS and new nuclear, simply haven’t. CCS remains a large laboratory experiment, and the nuclear renaissance has collapsed due to the cost and risk associated with the construction of new plant. Not only is the levelised cost of new wind and new solar PV now less than that of new nuclear, but the average time from planning consent to operation of a 1GW solar or onshore wind plant is one year, compared to at least twelve for new nuclear. Only last week, the developers of the Olkiluoto plant in Finland pushed out the commissioning date to 2018, some nine years later than the original plan. So, this clear direction of travel means that we have adapted our approach. We remain committed to the development of wind and solar energy. We believe they remain the keys to unlocking a sustainable future. But, we want to be able to capture value in developments across this new electric market. That will include investment in new grid, but it will be coupled with rapid deployment of energy storage. This combination with variable generation will allow for the expansion of smart technology, putting power into the hands of consumers – whether corporate or household – and further undermining the utility business model, which is already broken. You don’t have to keep up to date on a daily basis with trends in the sector to recognise that Google’s acquisition of Nest, or California’s mandate for energy storage, or technology breakthroughs like that of Oxford PV with perovskite thin-film solar cells, is all part of a relentless march to a very different future. My colleagues tell me that in smart technology terms we are moving to an anticipatory future, where technology predicts your future needs rather than just reacting to place-in-time commands. That mirrors the profound change across the electricity sector, where traditional models of utility provision are now being replaced by customer-led, smart supply and demand management. Or as UBS put it in a briefing note last month: Our view is that the “we have done it like this for a century” value chain in developed electricity markets will be turned upside down within the next 10-20 years… Even in my working lifetime within renewables, the market has profoundly changed. It is still the case that an important design parameter for the new electricity sector will be where you can capture and develop the generation. In the USA you have a wind corridor from the Dakotas to Texas; in Europe, the North Sea is a basin that lends itself to offshore wind, and potentially marine renewables as well; in China, inner Mongolia is an area of huge wind resource. In South Africa the sun rises in the morning and heats the Karoo, providing the resource to deliver some of the world’s cheapest wind and solar energy. The same phenomenon can be seen in the southern States of the US, in Chile’s Atacama, and in Australia. To this provision of bulk generation we must now add cheap, decentralised PV. In most of the inhabited world, every house and every business has the potential to become their own power station. When coupled with an electric vehicle, and some smart metering, the opportunity becomes overwhelming. As UBS say in their August Note: Our conclusion is that the combination of [solar PV, battery storage and an electric vehicle] is an economically viable investment already today…However, thanks to expected vast cost reductions for batteries, returns are likely to rise and payback times…shorten dramatically. By 2020 the payback time could drop to 7-8 years – in other words, the owner would receive free electricity for another 12-13 years. Free electricity for the 12 to 13 years of a 20 year investment, in a world of unsubsidised renewable generation. This is an extraordinary future, which we can already touch. Imagine your home in a few years’ time. You have an electric vehicle parked outside. You have solar PV panels on your roof and a small stationary battery in the garage, or you share one in a district scheme with your neighbours. The EV charges at night, and smoothes the demand curve. The battery stores excess solar electricity generated in the middle of the day and passes it back to the grid in the evening. In the morning, or at other periods of low generation, a combination of other renewables – mainly wind and biomass – drawn from remoter areas over an hvdc grid, fill in the gaps. You may even have an App – and why not – that gives you access not only to your own heating and lighting systems as you can today, but to pricing data and supply information. In fact – to go back to what I said about anticipatory technology, your SmartPhone will already be powering down or up appliances in your home, or your business, based on the pricing and demand criteria that you have already supplied. No more need for base-load, or large centralised power plant. No more paying out large sums to your utility by direct debit only to have your money earn them interest. No more market dominance. You the consumer, are in charge. This is why the more far-sighted electric utilities are scrambling to find a new business model. Their transition has to be to become energy service providers. Or, as Peter Terium, the relatively new CEO of RWE put it: In the future RWE’s competitive edge will be determined by our ability to be a service company applying energy supply capabilities and information technologies intelligently. Why must they do this? It is not simply, as someone else put it, that solar is eating their lunch, or that they are locked into what Michael Liebreich of Bloomberg New Energy Finance described as the “utility death spiral”. It is simply that they face a multitude of challenges that combine to create an existential threat to their businesses. These include:
- The reducing load factors on their current generation fleet, driven by the increased penetration of renewables, which is leading to lowered profits and stranded assets
- Their inability to meet take-or-pay type fuel contracts
- The increased energy efficiency of their largest customers, leading to lower demand for their product and
- The falling wholesale price of electricity as zero marginal cost renewables carve out a bigger share of generation.